No such thing as a free lunch! The dangers of pension freedoms
New Financial Conduct Authority (FCA) data has lifted the lid on use of the pension freedom rules.
Then-chancellor George Osborne overhauled the pensions system in his 2014 Budget when he said savers would no longer have to choose between an annuity or income drawdown and could instead access their pot after age 55.
These withdrawals are known as uncrystallised funds pension lump sums and you get the first 25% tax-free, with the rest charge at your own rate of income tax.
Turning your hard-earned pension savings into cash may sound tempting, but there are risks that without careful financial planning your retirement pot could quickly disappear.
The latest FCA data on the retirement market for 1 April 2018 to 31 March 2019 makes for startling reading.
Just over 645,000 pension plans were accessed to buy an annuity, move into drawdown or take a first cash withdrawal and 4 in 10 had a value of less than ÂŁ10,000.
The data showed more than 350,000 pension pots were fully withdrawn at the first time of access, 90% of which were less than ÂŁ30,000 in value.
The City watchdog said 40% of regular withdrawals were withdrawn at an annual rate of 8% or more of the pot value.
Perhaps more worryingly, 48% of plans were accessed without regulated advice or guidance being taken by the plan holder.
Just 37% were accessed with regulated advice.
Taking your retirement income is a big decision and all options have various benefits and risks.
Annuities provide a regular income for life but rates are low, while income drawdown lets you make regular withdrawals and still benefit from stockmarket growth, but your pot is also at risk from volatility in the markets and could fall in value.
Accessing cash may sound like the easiest and most simple option. After all, it is your hard-earned money so why shouldn’t you be able to spend it in your golden years?
But are you putting your retirement at risk? Retirement can now last for decades so will you need the money in your pension for anything else and can you cover your living costs if the pot runs dry.
Once the money is spent it is gone. You can’t get all those years of saving and tax relief back.
This makes financial planning rather than just grabbing your cash crucial.
Speak to your adviser for help with your retirement options.
- HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen
- The value of an investment and any income from it can fall as well as rise and you may not get back the original amount invested
- Past performance is not a reliable indicator of future performance and should not be relied upon
